Bilta: litigation privilege attaches to documents created during internal investigation into VAT claim

16 February 2018. Published by Adam Craggs, Partner

In Bilta (UK) Ltd (in liquidation) and ors v Royal Bank of Scotland Plc and another [2017] EWHC 2525 (Ch), the High Court has held that documents prepared by the Royal Bank of Scotland Plc (RBS) in the course of an investigation into allegations made by HMRC were protected by litigation privilege.


Following two years of  meetings between HMRC and RBS, HMRC wrote to RBS on 29 March 2012, indicating that an assessment against RBS would be issued for over claimed VAT of £86m in relation to certain carbon credit trades, on the basis that RBS "knew or ought to have known" that the trades were connected to VAT fraud (the HMRC Letter). 

Following receipt of the HMRC Letter, RBS instructed external lawyers to carry out an investigation and prepare a report of events that occurred in the relevant period to assist with the investigation (the Report).  During the course of the investigation, the lawyers interviewed RBS employees to ascertain the events that had occurred.  The lawyers concluded in the Report that HMRC's assessment was time barred and in any event RBS did not know, and could not have known, that the trades were connected to VAT fraud. 

The claimants sought disclosure and inspection of the documents underlying the Report, and in particular, the records of the employee witness interviews. 

RBS argued that, applying the test set out in Three Rivers District Council v Governor & Company of the Bank of England (No 6) [2005] 1 AC 610, the documents were subject to litigation privilege as the Report was created for the sole or dominant purpose of litigation, namely, defeating the expected assessment. The claimants disputed this and argued that the test was not met. 

The claimants relied on Serious Fraud Office (SFO) v Eurasian Natural Resources Corporation Ltd [2017] EWHC 1017 (QB), and argued that the documents were created for the purpose of avoiding litigation (as opposed to defending it). 

RBS argued that although, in conducting an investigation and creating the Report, it had other purposes, including maintaining a good relationship with HMRC and trying to persuade it to change its mind about the assessment, this did not preclude it from preparing for anticipated litigation at the same time.  A director of RBS stated in his witness evidence that receipt of the HMRC Letter represented a significant shift from a preliminary HMRC investigation to a tax dispute.  From this moment on, RBS argued that all documents prepared were for the dominant purpose of litigation.

High Court judgment   

Sir Geoffrey Vos dismissed the application, finding that litigation privilege had been established. 

He referred to Re Highgrade Traders [1984] BCLC 151 (CA), in which the liquidator of an insurance company sought disclosure of reports into a fire where arson by the insured was suspected. In that case, Oliver LJ said:

"What then is the purpose of the reports? The learned judge found a duality of purpose because, he said, the Insurers wanted not only to obtain the advice of their solicitors, but also wanted to ascertain the cause of the fire. Now, for my part, I find these two quite inseparable. The insurers were not seeking the cause of the fire as a matter of academic interest in spontaneous combustion."

The Court of Appeal in Highgrade was satisfied that the purpose of determining the cause of the fire was all part of the litigation purpose, which was dominant.

Vos LJ noted the claimants’ arguments that, in conducting the review and creating the Report, RBS had other purposes, including maintaining a good relationship with HMRC and trying to persuade HMRC to change its mind about the assessment, however, he concluded that all of these purposes were "effectively subsumed under the purpose of defeating the expected assessment".

The commercial reality was that RBS knew that it was likely that an assessment would follow receipt of the HMRC Letter. It took steps to protect its position which were consistent with its "overarching purpose" of preparing for litigation.

The judge commented that:

"Just as the insurers [in Highgrade] were not determining the cause of the fire as a matter of academic interest, RBS was not spending large sums on legal fees here in the hope that HMRC would be dissuaded from issuing an assessment."


Although Vos LJ was keen to emphasise that the question of the purpose for which documents are prepared is one of fact to be determined in the individual circumstances of each case, his decision will be welcomed by taxpayers who wish to instruct external lawyers to conduct an internal investigation when faced with potential litigation against HMRC. They will be able to argue that documents, such as interview notes, are subject to litigation privilege provided such documentation was created for the sole or dominant purpose of litigation, namely, appealing to the First-tier Tribunal an expected HMRC assessment. Taxpayers wishing to conduct an internal investigation should seek specialist legal advice before any such investigation is commenced in order to ensure that all evidential issues relating to 'dominant purpose' are properly addressed.

A copy of the judgment can be viewed here.

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